How Digital 2.0 Is Driving Bankings Next Wave of Change

By holistically harnessing the rich capabilities of AI, blockchain, IoT, RPA and open banking, financial institutions can build a more resilient, customer-focused bank of the future that incorporates the virtues of nonbanking rivals.

DIGITAL BUSINESS

August 2017

2 | How Digital 2.0 Is Driving Bankings Next Wave of Change

Digital Business

EXECUTIVE SUMMARY

In the last few years, a wave of digital technologies changed the banking landscape as we know it.

Social and mobile altered the way banks engage with customers. Analytics enabled hyper-

personalized offerings by making sense of large datasets. Cloud technologies shifted the computing

paradigm from a Cap-Ex-oriented model to a more flexible Op-Ex model, enabling delivery of multiple

business processes as services from third-party platforms.

Now, a second wave of disruption, or Digital 2.0, is set to drive even more profound change. This

time, the influential technologies include robotic process automation (RPA), artificial intelligence

(AI), Internet of Things (IOT) instrumentation, blockchain distributed ledger and shared

infrastructure, and open banking platforms controlled by application programming interfaces (API).

These are the forces that will power the banking industry and reshape how financial institutions

evolve and operate for the foreseeable future.

While these Digital 2.0 components come of age, financial institutions (FIs) remain in a value-

discovery phase, conducting multiple trials and experiments, some of which are generating value

across the financial services value chain. Global assets under management by AI-driven

robo-advisory, for example, will total USD$8 trillion by 2020,1 according to some estimates, and in

2016, blockchain start-ups reaped USD$500 million in investments.2

As these technologies become commercialized, and demand increases for digitally-enabled

services, we expect the banking industry to see unprecedented disruption, particularly as

nontraditional banks and fintechs rush into all segments of the banking space. The resulting bank

of the future will be characterized by the following traits and roles:

Orchestrator of personalized customer journeys. FIs will need to create expansive solutions

and a rich, curated customer experience across touchpoints.

Smart aggregator of capabilities across the banking ecosystem. FIs will need to channel

capabilities available in the evolving banking ecosystem rather than building offerings from the

ground up.

Provider of platform-based products/services. FIs will use platforms to serve entire business

lines, hastening the development process and facilitating improved operational agility and speed

of deployment and integration.

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Digital Business

Lean operator supported by front-office to back-office digitization. FIs will need to optimize

expenditures in conventional business operations, while freeing budget and human resources to

innovate by building smart products and services.

Intelligent processor of data to expand the business footprint. FIs will create micro-seg-

mented customer groups by combining big data with thick data (ethnographic/human

behavioral data) to reveal customer intent and needs.

Agile service unit consuming on-demand offerings. FIs will be pressured to decouple their

dependency on on-premise systems and shift to software-as-a-service offerings on the cloud

that boost agility, improve flexibility, reduce total cost of ownership (TCO) and accelerate provi-

sioning.

Digital 2.0 has the potential to help FIs lead from the front. While each component of Digital 2.0

might create disruption on its own, the bank of the future will be realized by fusing multiple ideas; for

example, the customer acquisition process could be transformed through a natural/human-like

interface enabled by AI, combined with real-time KYC via blockchain and RPA for account provisioning.

However, several practical challenges should be acknowledged:

AI and RPA pose unique governance, trust and reputational challenges.

The IoT has major implications for security and privacy, such as the potential for exposing sen-

sitive personal information, device spamming, device hacking, etc.

Blockchain promises to upend traditional banking models of trusted intermediaries but intro-

duces scalability and performance issues, and requires greater collaboration with heretofore

rivals to create economies of scale. Moreover, the introduction of a decentralized network

threatens to undermine stable revenue models and will require a large investment in system

integration services to connect legacy systems with shared infrastructure and distributed ledger

ecosystems.

This whitepaper examines key considerations for banks as they explore value in the emerging Digital

2.0 world. It proposes alternative approaches for developing use cases that combine various Digital

2.0 concepts to maximize value creation. In addition, it presents our take on the Digital 2.0 operating

model and the critical imperatives banks must transcend by focusing on smart collaboration,

holistically connecting digital technologies, and embracing platform thinking.

Digital Business

| How Digital 2.0 Is Driving Bankings Next Wave of Change4

THE NEXT WAVE OF DIGITAL TRANSFORMATION

The second half of the 20th century saw a wave of banking sector transformation, including a major

conversion to electronic operations and the introduction of ATMs. Together, these led to an effi-

ciency- and automation-driven model that made banking more transactional and technology-centric.

Banks focused on faster and more convenient transactional services for their end consumers via

ATMs, e-cards and telephonic services.

Social, mobile, analytics and cloud technologies (the SMAC stack) fueled a second wave of change

that is just now taking shape. The role of technology has rapidly changed from a monolithic enabler

of efficiency to an engine for personalized and ubiquitous provisioning of banking services for digi-

tally connected customers.

We now see the emergence of another disruption, known as Digital 2.0, which will leave an altered

banking landscape in its wake. Digital 2.0 (see Figure 1) has emerged from numerous human experi-

ence studies, new-age business constructs (such as decentralized currencies and alternative

platforms) and technology research (such as virtual personal assistants). When fully assembled, the

technologies of this era will drive a much deeper level of personalization through smarter use of data,

and could disintermediate or significantly undercut the industrys structure, forever changing the

essential nature of banking and the customer journey.

We envision widespread adoption and commercialization of products and services based on Digital

2.0 thinking within the next few years, and are already seeing sustained experimentation and value

discovery undertakings around Digital 2.0 constituent parts, such as blockchain,3 AI and IoT.

The Evolution of Banking

The pace of financial services innovation has accelerated from leisurely to turbo-charged.

MobileMainframe

Pre-Digital/Traditional

ATM Batch

Social

Analytics Cloud

Branch

Digital 1.0

ArtificialIntelligence

Robotics ProcessAutomation

Internet ofThings

Blockchain

Digital 2.0

Open Banking

PRE-DIGITAL/TRADITIONAL DIGITAL 1.0 DIGITAL 2.0

Figure 1

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LIMITLESS POTENTIAL, WORK IN PROGRESS

Multiple trials of Digital 2.0 technology initiatives are taking place across the banking and financial

services industry (see Figure 2). While leaders have shown keen interest in Digital 2.0 research and

small-scale incubation, several organizations have dedicated funding to develop business use cases

powered by Digital 2.0 thinking and technology; some are experimenting with them in real-life cus-

tomer situations.

Were already seeing sustained experimentation and value discovery undertakings around Digital 2.0 constituent parts, such as blockchain, AI and IoT.

Value Discovery in Digital 2.0

A North American bank has partnered with a cloud-based accounting provider to provide end-to-end reconciliation and cashflow services.

A regional U.S. bank has partnered with a leading fintech to offer core banking services.

Leading global banks are using real-time distributed ledgers to reduce settlement costs.

A leading global bank has used blockchain for secure document transfer.

A large U.S. bank uses AI chatbots to improve customer self-service and provide value-added customer services.

A leading credit card network is using machine learning for real-time fraud analysis.

A major credit card network is using geolocation (mobile data) and other sensors (biometric) in credit/debit card transactions to enhance transaction security.

A leading global bank uses beacons for enhanced branch services.

A large European bank is using RPA for data extraction.

A large U.S. financial services provider is automating customer notifications (e.g., collections) through RPA.

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